Opinion: Why Gold and Platinum Prices Are Dimming Stocks

Green hydrogen opens doors to increased demand for platinum

<div id=”js-article__body” itemprop=”articleBody” data-sbid=”WP-MKTW-0000164606″>

Platinum is skyrocketing while gold is struggling and that’s not good for the American stock market. However, commentators consider platinum’s PL00 rise, + 0.99% to a six-year high, to be bullish, theorizing that it reflects optimism about the post-pandemic economic recovery, while the decline in GC00 of gold, -0.38% in the last six months dismantling operations carried out in 2020 to cover the possibility of a much worse pandemic.

While there is some truth to these interpretations, this hopeful news is already being reflected in stock prices. What they mean for the future is something else entirely. Consider a 2019 academic study in the Journal of Financial Economics: It showed that a declining gold-platinum ratio predicts lower stock market returns over the next 12 months, not higher. Entitled “Gold, Platinum and Expected Equity Returns,” its authors are Darien Huang, former professor of finance at Cornell University, and Mete Kilic, professor of finance at the University of Southern California. The declining gold-to-platinum ratio currently paints a sobering picture about the stock market outlook for the next year. As you can see from the graph below, the gold-platinum ratio over the past six months has seen one of its steepest declines in years.

media-object type-InsetMediaIllustration inline article__inset article__inset–type-InsetMediaIllustration article__inset–inline “>

media article__inset__image__image”>

This ratio fell further on February 11, when gold fell $ 16 an ounce and platinum rose slightly. I have devoted several columns over the years to this ratio, and it performed credibly on those occasions before. The most recent was in April 2020 when I noticed the rising index predicting “US stocks. [being] “Substantially higher within a year.” The S&P 500 SPX, + 0.10% since then, has gained 38%. Why can the gold-platinum ratio predict the subsequent 12-month performance of the stock market? The reason, the professors argue, is that platinum and gold respond to different factors. The former mainly reflects changes in industrial demand, while gold responds both to that demand and to investors’ desire to hedge against economic and geopolitical uncertainty. When the gold-platinum ratio increases, therefore, investors believe that the risk increases. That, in turn, means that they will be less willing to invest in stocks until the stocks can hold the promise of higher returns. The result is that stocks will fall until their expected subsequent return is high enough to offset the increased risk. This is what we saw in February and March 2020. Investors ditched stocks as the risks posed by the pandemic also increased. After that slide had run its course, the outlook for stocks was very attractive. Today is the opposite mirror of what prevailed then. As the market has rebounded in recent months, the expected future returns of the stocks have fallen. What the gold-platinum relationship does is provide a sensitive barometer of where we are in this pendulum swing between greed and fear. The current message from the relationship is that the stock market recovery has largely run its course. Mark Hulbert is a regular contributor to MarketWatch. Your Hulbert Ratings tracks investment bulletins that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com Also read: The Small Cap Stock Rally is here to stay. Why These Analysts Say It’s Bad News for the S&P 500 Plus: Why Wall Street‘s ‘Coolest’ Stocks May Leave Investors Cold